Friday, April 24, 2015

China Daily: Unprecedented Development Ahead for Renminbi (Yuan)

A couple of China related news items in this blog post. First we have this China Daily article that once again makes it clear that China is on a slow and steady path towards getting the Yuan accepted as an international reserve currency. Then we have this Bloomberg article (carried on Yahoo) that talks about how China may be buying a lot of gold to better position the Yuan for inclusion in the SDR currency basket and to increase its international reserve currency status.

None of this will be news to readers here as we have covered all this extensively here. Below are quotes from each article and then some added comments.

The Bank of China's chief economist Cao Yuanzheng feels China's efforts to promote the renminbi (RMB) as an international currency is blazing a new trail in world history.

"I think this is an unprecedented process in economic history," Cao said in an exclusive interview with Xinhua on the sidelines of the "RMB: Going Global. The Bank of China Renminbi Internationalization Forum".

Renminbi development may be unprecedented but carefully mapped out nevertheless. In his remarks during the forum, Cao said the process has its roots back in the 1990s, and the veteran economist said he still believed it would take several more years for the level of international convertibility of the currency.

"I now think we can speak in terms of years and not decades," Cao said. "I cannot predict the time table, but I think we'll get there before 2020."

. . . .

"Yes, there are benefits for China but we believe it is also good for the world," Cao said. "There is deep need for another strong world currency (aside from the dollar and euro, the most used international currencies). For China, I would say there it is more of a challenge than a benefit."

Cao called for reform of the current international monetary and financial order, which dates back to the 1944 Bretton Woods Conference, which divided the world among the lines of developed and developing countries.

Cao noted that that dichotomy is now outdated, as evidenced by the fact that China, with the world's second largest economy, is a developing country. All told, three of the world's 10 largest economies are economies in transition.

"The international governance of the world financial system needs reform," Cao said."

"China’s push to challenge U.S. dominance in global trade and finance may involve gold -- a lot of gold. While the metal is no longer used to back paper money, it remains a big chunk of central bank reserves in the U.S. and Europe. China became the world’s second-largest economy in 2010 and has stepped up efforts to make the yuan a viable competitor to the dollar. That’s led to speculation the government has stockpiled gold as part of a plan to diversify $3.7 trillion in foreign-exchange reserves.The People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tons, says Bloomberg Intelligence, based on trade data, domestic output and China Gold Association figures. A stockpile that big would be second only to the 8,133.5 tons in the U.S."

“If you want to set yourself up as a reserve currency, you may want to have assets on your balance sheet other than other fiat currencies,” Bart Melek, head of commodity strategy at TD Securities, said by phone from Toronto. Gold is “certainly viewed as a viable store of value for an up-and-coming global power,” he said.

China may be preparing to update its disclosed holdings because policy makers are pressing to add the yuan to the International Monetary Fund’s currency basket, known as thet Special Drawing Right, which includes the dollar, euro, yen and British pound. The tally may come before the IMF’s meetings on the SDR next month or in October, Nomura Holdings Inc. said in an April 8 report."

These two articles touch on two of the most hotly debated topics we have covered here on the blog. Namely, what are China's plans for the Yuan and then how much gold does China own now and why are they buying so much of it?Just a couple of observations here. First, every time we see a Chinese official of any kind talk about plans for the future of the Yuan, they always give a fairly long time frame for change to take place. This date of 2020 is actually one of the closer to the present dates I have seen mentioned. Also, when you see China talking about how the "international governance of the world financial system needs reform", you should understand that China prefers this reform to take place inside the IMF. The second article talking about China buying gold again makes it clear that getting the Yuan added to the SDR currency basket at the IMF is the current goal. Until there is other solid evidence available, we have to conclude that China is NOT trying to abandon the IMF and setup the Yuan on its own as an international reserve currency. The day might come where they feel they have to do this if the 2010 IMF reforms stay stalled forever. But for now, they clearly intend to continue to try and work within the IMF to increase the reserve status of the Yuan. Whatever China does, it is becoming clearer that gold is playing a role behind the scenes in whatever monetary system changes we may get in the future.One other note: Jim Rickards did predict in his book The Death of Money that China would release a public update of its gold reserves in 2015 as he points out in this twitter comment.

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